Investors Will Want Olam Group's (SGX:VC2) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Olam Group (SGX:VC2) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Olam Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.081 = S$1.6b ÷ (S$32b - S$12b) (Based on the trailing twelve months to December 2022).

Therefore, Olam Group has an ROCE of 8.1%. On its own, that's a low figure but it's around the 8.9% average generated by the Consumer Retailing industry.

Check out our latest analysis for Olam Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Olam Group's ROCE against it's prior returns. If you're interested in investigating Olam Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Olam Group Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Olam Group has. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about Olam Group, we've spotted 2 warning signs, and 1 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.